Strategy from Financial Point of View and VBMReading Time: 3 minutes
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Finances have always been a key element of the managerial accounting practice. However, in the past few decades the perspective of research on this aspect has shifted from shorter-term decision analysis to a more strategic approach, aimed at building up shareholder value. This was caused by the observation that oftentimes, positive short-term financial results do not correlate with the organization’s performance over long periods of time.
Approaches to the Financials of Strategizing: Accounting, BSC, VBM
Various schools of strategy management tackled this situation differently. Some deemed it enough to calculate the costs of all aspects of strategic planning, but then would basically sit on this data, going nowhere with it. That’s why the following two POVs took the general template of accounting, but widely developed it.
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Balanced Scorecard Financial Perspective
A good example of strategic outlook on the financials of planning can be seen in the Balanced Scorecard (BSC) methodology. It describes 4 perspectives from which one should look at business:
- Internal Business Processes
- Learning and Growth
The former perspective is what interests us today. According to the BSC, any for-profit organization should concentrate on the following financial goals:
- Improve profits (e.g. by developing customer value proposition)
- Cut costs (e.g. by optimizing resources)
- Increase revenue (e.g. by developing new sources of revenue)
Value Based Management Strategy
Under this philosophy, the shareholders’ interests should become the focal point of managerial activities. This sets the framework for creating, managing, and measuring value. It’s important to notice that “value” in this theory does not equal profits per se, but rather the long-term effect of each decision on the organization’s profitability and sustainability. Let’s take a closer look at the ins and outs of this methodology.
Value Definition and Value Creation Mindset in VBM
So, what exactly is “value” in the Value Based Management system? It is a combination of the discounted cash flows (DCF) of the organization – that is, the returns from investments that exceed the cost of the capital. DCF is a great metric in the context of VBM (although some would argue – the only suitable one), as it is bound to the balance sheet, all the while taking a long-term view.
How to get the most out of VBM in planning? By employing the value creation mindset. It takes embracing the task of value maximization as the main financial goal. Or, speaking specifically about strategic planning, the task is in creating a competitive long-term strategy plan.
Defining your Value Drivers
Value driver is an activity of your organization that affects the value. It’s a simple concept, but one that is vital to understand: not all of your actions create the value, nor should they always do. But in the Value Based Management system, value drivers must be identified, prioritized, and properly organized for stakeholders’ use (e.g. in a digital planning tool).
Management Processes and Systems in VBM
The value and value creation mindset is a crucial theoretical part, but now it’s time to get down to business. Value Based Management method is put into effect by utilizing specific management processes & systems. Namely, there are four of them:
- Develop a strategy
- Set targets
- Define action plans & budgets
- Manage performance
That’s it! Applying this management process framework and retaining the value creation mindset is a sure way to reach your value-oriented goals. Now, the Value Based Management system has seen its share of criticism lately. Mainly – due to the fact that under it one can only realistically evaluate the success of their actions post factum, not proactively. Even still, VBM remains a great tool for strategic planning from financial POV. So, do make sure to at least try it out with your business!